Roosevelt Investments is now CI Roosevelt Private Wealth

Positioning for Rates

Published on Nov. 13, 2018

Positioning for Rates

In the News:

Last week it was not a surprise that the Federal Reserve decided to hike interest rates for a third time this year, for a total of eight hikes since December 2015. Short term rates seem to be getting closer to the Fed’s goal of a neutral level. The Fed is projecting another 25bps hike in December of this year along with three more hikes next year and one in 2020. Whether they pause in between any of those points would depend on the path of GDP growth, which has been growing at a healthy pace this year; on core inflation, which is near the Fed target of 2%; and on employment trends. With the current Fed Funds rate at 2.25%, searching for a higher level that neither restricts nor supports economic growth could be tricky, as the yield curve may be on the cusp of inversion.

As the Fed continues to push short term rates higher, longer term rates have not moved upwards with the same exuberance. After touching 3.11% in mid-April and late-May, the 10 year US treasury retreated back below 3% this summer before rising back to 3.09% in late September. As we mentioned in our second quarter commentary, “This has us questioning the direct impact on market rates and the yield curve, with the Fed’s engineered rate increases. We are inclined not to be too focused on interest rate anticipation strategies, as prognostications of higher market rates haven’t borne out.”

Our Thoughts:

We believe we remain well positioned to take advantage of higher yields should they materialize. Our approach is to seek to build client portfolios with the most attractive levels of internal cash flows while limiting traditional bond market risks as reasonably as possible. Income investors have waited a long time to see yields rise, and have been forced to remain patient throughout a prolonged low-yielding environment. Investment decisions should be based on long term plans and risk tolerance levels. As active managers, we seek to provide value by filtering out the noise, making reasonable and informed decisions, and diversifying in preparation for interest rate volatility.

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